delpro report on examination as of 12-31-2010...delaware professional insurance company, a risk...

REPORT ON EXAMINATION

OF THE

DELAWARE PROFESSIONAL INSURANCE COMPANY, RISK RETENTION GROUP

AS OF

DECEMBER 31, 2010

ii

TableofContentsSALUTATION ................................................................................................................... 1

SCOPE OF EXAMINATION............................................................................................. 2

SUMMARY OF SIGNIFICNAT FINDINGS .................................................................... 3

SUBSEQUENT EVENTS .................................................................................................. 3

COMPANY HISTORY ...................................................................................................... 3

MANAGEMENT AND CONTROL .................................................................................. 5

FIDELITY BOND .............................................................................................................. 7

TERRITORY AND PLAN OF OPERATION ................................................................... 7

GROWTH OF THE COMPANY ..................................................................................... 11

LOSS EXPERIENCE ....................................................................................................... 12

ACCOUNTS and RECORDS ........................................................................................... 12

STATUTORY DEPOSITS ............................................................................................... 12

FINANCIAL STATEMENTS .......................................................................................... 13

NOTES TO FINANCIAL STATEMENTS ...................................................................... 18

COMPLIANCE WITH PRIOR EXAMINATION RECOMMENDATIONS ................. 19

SUMMARY OF RECOMMENDATIONS ...................................................................... 19

CONCLUSION ................................................................................................................. 20

SALUTATION

January 31, 2012

Honorable Karen Weldin-Stewart-CIR-ML Insurance Commissioner State of Delaware 841 Silver Lake Boulevard Dover, Delaware 19904

Dear Commissioner:

In compliance with instructions and pursuant to statutory provisions contained in

Certificate of Authority No. 11.158 dated June 9, 2011, an examination has been made of the

affairs, financial condition and management of the

DELAWARE PROFESSIONAL INSURANCE COMPANY,

RISK RETENTION GROUP

hereinafter referred to as “Company”, incorporated under the laws of the State of Delaware. The

examination was conducted at the offices of the I. David Gordon Associates, Inc. (I. David

Gordon Associates), located at 845 Third Avenue – 20th floor, New York, New York 10022-

6601.

The report of examination thereon is respectfully submitted.

Delaware Professional Insurance Company, a Risk Retention Group

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SCOPE OF EXAMINATION

The last examination was as of December 31, 2007. This examination covered the period

of January 1, 2008, through December 31, 2010, and encompasses a general review of

transactions during the period, the Company’s business policies and practices, as well as

management and relevant corporate matters, with a determination of the financial condition of

the Company at December 31, 2008. Transactions subsequent to the examination date were

reviewed where deemed necessary.

We conducted our examination in accordance with the National Association of Insurance

Commissioners (NAIC) Financial Condition Examiners Handbook (Handbook) and generally

accepted statutory insurance examination standards consistent with the Insurance Laws and

Regulations of the State of Delaware. The NAIC Handbook requires that we plan and perform

the examination to evaluate the financial condition and identify prospective risks of the

Company by obtaining information about the Company including corporate governance,

identifying and assessing inherent risks within the Company and evaluating system controls and

procedures used to mitigate those risks. The examination also included assessing the principles

used and significant estimates made by management, as well as evaluating the overall financial

statement presentation, management’s compliance with Statutory Accounting Principles and

annual statement instructions when applicable to domestic state regulations.

All accounts and activities of the Company were considered in accordance with the risk

focused examination process. The examination report addresses regulatory issues reviewed

during the examination process.

During the course of this examination, consideration was given to work performed by the

Company’s external accounting firm, Johnson Lambert & Company, LLP (JLC). Certain auditor


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work papers have been incorporated into the work papers of the examiners and have been

utilized in determining the scope and areas of emphasis in conducting the examination.

This report of examination was confined to financial statements and comments on matters

that involved departures from laws, regulations or rules, or which were deemed to require special

explanation or description.

SUMMARY OF SIGNIFICNAT FINDINGS

The recorded minutes of the Board of Directors (Board) were reviewed for the period

under examination. The recorded minutes of the Board adequately documented its meetings and

approval of Company transactions and events, except for the approval of investment transactions

in accordance with 18 Del. C. §1304.

Therefore,

It is recommended that the Board of Directors or a committee thereof authorize or approve the investments as required by 18 Del. C. §1304.

SUBSEQUENT EVENTS

There were no significant events subsequent to the examination date.

COMPANY HISTORY

The Company was incorporated in the State of Delaware on May 23, 1990, as a mutual

captive insurer. With the approval of the Delaware Insurance Department effective October 4,

2007, the Company was converted to a captive risk retention group. The purpose of the


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Company is to participate in the medical malpractice insurance program covering the Delaware

Physicians Insurance Purchasing Group, Inc. (DPIPG) and its members as well as Sovereign

Risk Purchasing Group, LLC (SRPG) and its members (originally named the New Jersey

Professional Risk Purchasing Group, LLC when the name was changed November 9, 2009). The

members of DPIPG and SRPG have complete control over the Company in a manner consistent

with its bylaws.

Corporate Records

The recorded minutes of the shareholders, Board of Directors (Board) were reviewed for

the period under examination. The recorded minutes of the Board adequately documented its

meetings and approval of Company transactions and events, except for the approval of

investment transactions in accordance with 18 Del. C. §1304.

Therefore,


Capitalization

As of December 31, 2010, the Company’s reported policyholder surplus of $3,583,222

complies with the minimum requirement of $1,000,000 for a captive risk retention group in

Delaware.


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MANAGEMENT AND CONTROL

Members of the Company are those individuals, partnerships and corporations who are

members of DPIPG and SRPG and acquire insurance from the Company through its indemnity

agreements with DPIPG and SRPG. Membership in DPIPG and SRPG is not transferable and

ceases upon a member’s death. Members are divided between Class A members (DPIPG) and

Class B and Class C members (SRPG). Class A members have full voting rights and powers

and, voting as a separate class, shall elect all directors of the Company except for the Class B and

Class C director. Class A members have one vote per $1,000 of annual premium such member is

required to pay. The Class B and Class C members have no voting rights or powers except to

elect, voting as a separate class, one director of the Company.

In conjunction with the conversion to a risk retention group, the Company amended and

restated its articles of incorporation and bylaws effective October 4, 2007. The Company’s

current bylaws, which were amended and restated effective October 27, 2009, specify that a

Board of Directors shall consist of not less than three nor more than fifteen members and that

directors need not be members. The following nine directors were duly elected in October 2010

and were serving at December 31, 2010:

Ben C. Corballis, M.D. (Chairman) Gregory W. DeMeo, M.D. Steven L. Edell, D.O.

Stephen L. Hershey, M.D. I. David Gordon Robert A. Portz, M.D.

Neil Jasani, M.D. Eric Johnson, M.D. Leonard A. Nitowski, M.D.

.


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All of the Company’s directors are members of DPIPG or SRPG, with the exception of I.

David Gordon, who is an insurance broker and, through an agreement with I. David Gordon

Associates, the general manager of the Company.

In compliance with its current bylaws, the Board of Directors maintains an Executive

Committee, who shall be responsible for the management of the Company between meetings of

the Board of Directors, consisting of;

Ben C. Corballis, M.D.

Steven L. Edell, D.O.

I. David Gordon

Stephen L. Hershey, M.D.

The Board of Directors also maintains a Finance Committee, consisting of:

Ben C. Corballis, M.D.

Steven L. Edell, D.O.

Leonard A. Nitowski, M.D.

The following officers were duly elected and serving at December 31, 2010:

Ben C. Corballis, M.D. President

I. David Gordon Vice President and Secretary

Stephen L. Hershey, M.D. Vice President and Treasurer

Affiliated Agreements

The Company has entered into an agreement with I. David Gordon Associates, Inc.

(IDGA), whereby IDGA serves as management, broker and risk management consultant for

DPIPG, SRPG and the Company. An officer of IDGA serves as an officer and director of the


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Company. The Company incurred $127,747 and $197,471 in consulting fees under this

agreement during 2010 and 2009, respectively.

FIDELITY BOND

The minimum amount of coverage suggested by the NAIC for a company this size is

$125,000. As of December 31, 2010, the Company was covered by a surety bond effective April

23, 2010, and expiring April 23, 2013, in the amount of $150,000.

TERRITORY AND PLAN OF OPERATION

As of December 31, 2010, the Company maintains a certificate of authority in Delaware

and is registered as a risk retention group in New Jersey.

DPIPG is a non-profit corporation set up to execute a medical malpractice insurance

program for its Delaware member physicians and physician groups. The components of the

DPIPG insurance program are two-fold:

(1) Under a master policy issued to DPIPG by Continental Casualty Company (Continental

Casualty), effective December 31, 2009, and expiring December 31, 2010, (renewable

annually thereafter each January 1st) individual insured members receive standard

malpractice insurance coverage of $1,000,000/$3,000,000 each claim/aggregate with

optional increased coverage to each insured member of either $2,000,000/$4,000,000

each claim/aggregate or $3,000,000/$5,000,000 each claim/aggregate. The master policy

includes a self-insured retention of $300,000 each claim, with an aggregate policy limit

on a stand-alone basis of $3,502,000, which applies only to the Delaware physicians, and


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an aggregate policy limit on a combined basis of $3,456,000, which applies to both the

Delaware physicians and the New Jersey physician members. The aggregate retention is

based on the number of “physician equivalents” participating in the program. The

physician equivalent programs seeks to equalize the various physician specialties within

an identified scale, with higher risk specialties graded a higher physician equivalent

score. It is the number of “class one” equivalent physicians that will determine the

aggregate retention under the Continental Casualty policy. Each individual insured

member receives a certificate of coverage.

(2) The Company’s function is to provide insurance coverage to fund the retentions (both

individual and aggregate) of DPIPG and its members. It is noted, with emphasis, that

Continental Casualty is not reinsuring the Company. Premiums for each type of coverage

(medical malpractice and retention) are rated separately. Of significance is that paid

allocated loss adjustment expenses are included in the Company’s coverage and are

provided in addition to the Continental Casualty coverage. Paid expenses are included in

the retention.

Effective April 28, 2008, the Company began providing coverage for New Jersey

physicians through SRPG, a non-profit corporation set up to execute a medical malpractice

insurance program for its New Jersey member physicians and physician groups. Under a master

policy issued to SRPG by Columbia Casualty Company (Columbia Casualty), an affiliate of

Continental Casualty in the CNA Group, effective January 1, 2010, and expiring December 31,

2010, (renewable annually thereafter each January 1st) individual insured members receive

standard malpractice insurance coverage of $1,000,000/$3,000,000 each claim/aggregate. The


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master policy includes a self-insured retention of $400,000 each claim, an aggregate policy limit

on a combined basis of $3,702,000, which applies to both the Delaware physicians and the New

Jersey physician members.

Insurance provided by the Company is on a claims-made, calendar-year basis. The

Company anticipates collecting sufficient premiums each term to fund the annual retention. In

this way, no additional losses will develop. It is the Company’s intention to close each policy

year as quickly as possible after its expiration. Profits, if any, are intended to be distributed to

members in the form of a premium reduction, the amount of which is based on premiums paid.

Member dividends totaling $9,762 were distributed in 2010.

The Company, DPIPG and SRPG are administered jointly. DPIPG and SRPG fund joint

operations through the levying of initiation and membership fees.

Pursuant to a general management agreement in effect through July 15, 2008, with

Wilmington Professional Associates, Inc. (Wilmington Professional Associates), the Company

utilized the services of Wilmington Professional Associates, a licensed Delaware captive

manager and approved by the Delaware Insurance Department as a captive manager, for full

captive management services. Pursuant to a general management agreement effective July 15,

2008, the Company has utilized the services of I. David Gordon Associates, a licensed New York

captive manager and approved by the Delaware Insurance Department as a captive manager, for

full captive management services. This agreement replaces the general management agreement

with Wilmington Professional Associates described earlier in this paragraph. I. David Gordon is

the controlling person of I. David Gordon Associates.


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Johnson Lambert & Co., LLP, an independent certified public accounting firm approved

in Delaware, audits the Company’s annual financial statement. Fees paid under this agreement

during 2010 amounted to $ 34,968.

Huggins Actuarial Services, Inc. acts as an actuarial consultant to the Company and

prepares actuarial feasibility studies as well as annually certifies the Company’s reported loss

and loss adjustment expense reserves. Fees paid under this agreement during 2010 amounted to $

16,648.

The Barnett Group, LLC, pursuant to a claims administration agreement effective

December 2003, provides claims administration and consulting services related to claims

handling. This agreement was terminated due to insolvency of The Barnett Group. Fees paid

under this agreement were $61,768. The services provided ended on June 30, 2010.

Subsequently, AEJA, INC. (Adrienne Auryansen) was engaged as Third Party Administrator and

I David Gordon Associates, Inc. was assigned the responsibility for claim data management.

Breckenridge Consulting LLC, pursuant to an investment advisory agreement effective

August 30, 2010, provides investment portfolio management services for the Company’s

invested assets.

Marcum & Kleigman LLP, pursuant to an administrative services agreement, provided

accounting, regulatory reporting and tax preparation services to the Company until August 18,

2009. This agreement was terminated and replaced with a similar administrative services

agreement with HSBC Insurance Agency (USA), Inc. (HSBC) effective August 18, 2009.

Effective March 24, 2011, HSBC was sold to Kane (USA), Inc. (Kane) and all administrative

services originally provided by HSBC are now be provided by Kane pursuant to a novation

agreement with HSBC. Fees paid under this agreement during 2010 amounted to $43,072.


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GROWTH OF THE COMPANY

The financial growth of the Company covers the period from its last examination at December

31, 2007, to this examination at December 31, 2010, and is summarized as follows based on

information obtained from the Company’s filed annual statements:

YearAdmitted Assets Liabilities

Surplus as Regards

Policyholders Premiums Net Income2007 $9,106,637 $7,859,421 $1,247,216 $209,849 $19,077 2008 10,162,137 7,569,700 2,592,437 2,810,034 353,6212009 11,103,342 8,535,398 2,567,944 2,527,603 -24,2512010 11,752,111 8,168,889 3,583,222 2,684,888 1,092,069

The growth over the examination period is summarized as follows:

29.0% increase in admitted assets

3.9% increase in liabilities

187% increase in policyholder surplus

1,179% increase in premiums earned

5,624% increase in net income

The 187% increase in policyholder surplus is attributable primarily to new membership in

the RRG with contributed surplus of $1,021,738 in 2008. Additionally the Company was very

profitable in 2010 with net income of $1,008,043. The Company’s profitability was substantial


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in 2010 due to much lower incurred losses during the year. Premium increases are due to

expansion into New Jersey.

LOSS EXPERIENCE

The Company experienced favorable development of prior years as recorded in 2010 and

2009. The favorable development was the result of actual claim activity behaving better than

originally anticipated. The development recorded in 2010 relates primarily to the 2006 and 2008

policy years and the development recorded in 2009 relates primarily to the 2005 policy year,

which was offset by unfavorable development on the 2006 policy year.

ACCOUNTS and RECORDS

The Company maintains its records with the various service providers that have been

contracted. Those providers use a combination of client server, host, and network applications

which utilize various reporting systems to record and report financial information. The Captive

Manager regularly monitors these activities performed by the service providers for the Company

and reports these results to the Board of Directors.

STATUTORY DEPOSITS

The Company is a risk retention group and is not required to maintain statutory deposits.


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FINANCIAL STATEMENTS

The financial statements, as determined by this examination, are presented as follows:

Analysis of Assets as of December 31, 2010

Liabilities, Surplus and Other Funds as of December 31, 2010

Statement of Income for 2010

Reconciliation of Surplus for the Period since the Last Examination

Analysis of Changes in Financial Statements Resulting from Examination


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Analysis of Assets

AssetsNonadmitted

Assets Admitted Assets NoteBonds $ 8,790,956 $ 8,790,956 1 Cash, Cash equivalents and short-term investments 2,471,506 2,471,506 Investment income due and accrued 44,227 44,227 Uncollected premiums and agents' balances in the course of collection

240,727 240,727 Deferred premiums, agents balances and installments booked but deferred and not yet due 52,223 52,223 Deferred tax asset 330,275 $ 180,479 149,796 Aggregate write-in for other than invested asset (letter of credit)

752,675 750,000 2,675 Total Assets $ 12,682,590 $ 930,479 $ 11,752,111


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Liabilities, Surplus and Other Funds

Losses $ 4,440,851 2 Loss adjustment expenses 1,882,371 2 Other expenses 141,468 Taxes, licenses and fees 32,221 Current federal income tax payable 292,757 Unearned premiums 1,379,221 Total Liabilities $ 8,168,889

Gross paid-in and contributed surplus 973,342 Unassigned funds (surplus) 2,609,880 Surplus as regards policyholders $ 3,583,222

Total Liabilities and Surplus $ 11,752,111


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Statement of Income

Underwriting Income

Premiums earned $ 2,684,888 Deductions:

Losses incurred 554,217 Loss expenses incurred

566,250 Other underwriting expenses incurred 482,538 Total underwriting deductions 1,603,005 Net underwriting gain (loss) $ 1,081,883

Investment Income

Net investment income earned 226,098

Net realized capital gains (losses) net of capital gains tax 149,336

Net investment gain (loss) $ 375,434 Other IncomeFinance and service charges not included in premiums 3,416 Total other income $ 3,416

Net income before federal income taxes $ 1,460,732 Federal income taxes incurred 368,663 Net income $ 1,092,069


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Reconciliation of Surplus for the Period since Last Examination

2010 2009 2008 2007Beginning Capital and Surplus balance $ 2,567,943 $ 2,592,437 $ 1,247,216 $ 1,029,328 Net Income 1,092,073 (24,251) 353,621 19,077 Change in Non-Admitted Assets 713,638 27,837 (13,521) 29,305 Change in deferred income tax (12,274) 1,920 (16,617) 169,506 Member contributions 51,604 70,000 1,021,738 Return of capital (70,000) (100,000) Dividends to Stockholders (9,762) Other Gains (Losses) to Surplus (750,000) Change Current year 1,015,279 (24,494) 1,345,221 217,888 Ending surplus $ 3,583,222 $ 2,567,943 $ 2,592,437 $ 1,247,216

Analysis of Changes in Financial Statements Resulting from Examination

There are no changes in the financial statements resulting from the examination.


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NOTES TO FINANCIAL STATEMENTS

Note 1 - Bonds $8,790,956

The categories of bonds at December 31, 2010 include Government Bonds, $978,732 or

11%, US States and territories, guaranteed, $7,425,314 or 84.5% and Industrial and

Miscellaneous $386,910 or 4.5%. All of the Companies securities are rated as Class 1 by the

NAIC.

Note 2

Losses $4,440,851

Loss adjustment expenses $1,882,371

Actuarial services are provided to the Company by Huggins Actuarial Services, a

qualified independent actuary, who annually reviews the claims. For those years having no open

claims, zero reserves are established. For those years that have one open claim, the individual

paid retentions per outstanding claims is subtracted from $200,000 for the period beginning

December 1, 2001, and ending December 1, 2004. For the policy years December 1, 2004,

through December 31, 2010, the individual paid retentions per outstanding claims is subtracted

from $300,000 for Delaware physicians and $400,000 for New Jersey physicians. For years

having multiple open claims, aggregate paid retention for all claims, both open and closed, are

subtracted from the respective aggregate annual retention. This process was accepted for

examination purposes.


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COMPLIANCE WITH PRIOR EXAMINATION RECOMMENDATIONS

There were no recommendations from the prior examination.

SUMMARY OF RECOMMENDATIONS

The recorded minutes of the Board of Directors (Board) were reviewed for the period

under examination. The recorded minutes of the Board adequately documented its meetings and

approval of Company transactions and events, except for the approval of investment transactions

in accordance with 18 Del. C. §1304.

Therefore,



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CONCLUSION

The following schedule shows the results of this examination and the results of the prior

examination with changes between the examination periods:

Description December 31, 2010 December 31, 2007

Assets $11,752,111 $9,106,637

Liabilities $8,168,889 $7,859,421

Surplus $3,583,222 $1,247,216

Since the last examination as of December 31, 2007, the Company’s assets increased

$2,645,474, or 29%, from $9,106,637 to $11,752,111. Liabilities for the same period increased

$309,468, or 3.9%, from $7,859,421 to $8,168,889. Surplus as regards policyholders for the

same period increased $2,336,006, or 187.3%, from $1,247,216 to $3,583,222.

Respectfully submitted,

Anthony Cardone, CFE

Examiner-in-Charge

Delaware Department of Insurance

delpro report on examination as of 12-31-2010...delaware professional insurance company, a risk...

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